Religare on Axis bank - earnings review

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Axis Bank Ltd
NII surprises, PAT in-line
Axis Bank’s (AXSB) Q2FY11 results surprised positively at the NII level on
better-than-expected margins and investment income; PAT, however, was
largely in line due to higher operating expenses and lower growth in other
income (on lower trading gains; core fee income remained strong). Incremental
slippages were higher at 1.9% (ann.); however, this was in line with the
management guidance. We continue to like AXSB among private banks as we
believe it is best placed to capitalise on the rising corporate demand in the
backdrop of strong economic growth. We are upgrading our earnings estimates
for FY11/FY12 by 2%/4% to factor in the better-than-expected margins and
lower credit costs. We restate BUY with a revised price target of Rs 1,800. At
our price target, the stock will trade at 3.3x FY12 BV and 18x FY12 EPS.
NII growth at 40% YoY; advances growth in line with industry: NII growth
during the quarter was driven by a sharp increase in income on investments (Fig
2); we believe this could have primarily stemmed from migration of some
advances towards the CP market on account of the introduction of base rate and
higher income from investments in mutual funds. Advances grew by 1.8% QoQ
and 36.5% YoY mainly driven by higher exposure to the corporate segment;
growth in SME/retail segments remained muted at 6%/17% YoY (Fig 3).
NIMs beat estimates: Despite a sharp increase in wholesale rates in the last six
months and lower incremental C/D (only 21% during Q2FY11), the bank’s NIMs
slipped only 3bps to 3.68% due to a hike in the PLR and a ~140bps QoQ
improvement in CASA to 41.5%. Lower incremental C/D ratio could have risen
from a higher focus on deposit mobilisation and migration of some credit to the
CP market. We are increasing our NII estimates by 4%/2% for FY11/FY12 to
factor in the lower-than-expected contraction in NIMs.

Fee income lower due to accounting change; costs high: Other income growth
dropped 3% YoY largely due to a 52% decline in trading profits (Fig 4). Fee
income growth, at 19% YoY, was lower than historical rates; however, this can
be partially attributed to the change in accounting policy on commissions. After
adjusting for this change, fee income growth stood at 23%. Costs rose 9% QoQ
primarily due to a 17% QoQ growth in other expenses. As a result, cost/income
ratio increased from 42.3% in Q1FY11 to 43.9% in Q2FY11.
Delinquencies in line with guidance: Slippages at 1.9% (ann.) were in line with
that seen in Q1FY11. Of the total slippages of Rs 4.6bn during Q2FY11, Rs 0.9bn
came in from restructured assets (cumulative slippages now stands at Rs 5.4bn;
18% of restructured assets). While slippages could remain high in FY11 (we are
factoring in a slippages ratio of 1.8% for FY11), we expect it to decline to 1.5%
in FY12, in sync with the economic recovery.